The Givers and Their Attackers

The philosophical assault on philanthropy is really about extending government control

After years of public speculation about what Amazon founder Jeff Bezos would do with his massive fortune, he finally gave us an answer this fall. Bezos announced he would donate $2 billion to charitable organizations that provide food and shelter to the homeless and to a new network of Montessori preschools in low-income areas. To say that early childhood education and homeless shelters are among the favorite causes of the left would be an understatement. Yet the reaction to Bezos’s generosity was decidedly muted in liberal circles. Indeed, a tweet from Slate described his donation as “morally fraught,” whatever that might mean.

As the Slate critic Jordan Weissman explained, “While [Bezos] is busy trying to use his fortune to help the poorest of the poor, his company has become an almost perfect diorama of American inequality—from his own outrageous wealth, to the highly paid executives and tech employees, to the underpaid warehouse workers who often need to use food stamps to get by. Especially since so much of his wealth is tied up in the stock value of his company, every dollar Bezos gives away is in part a reminder that many of his workers could use a raise.” Bezos, in other words, piled up his fortune by exploiting his workers; therefore his charitable donations are the fruits of an unjust enterprise.

But the critics go further and insist that, in addition to being rebuked for the way he made his money, Bezos should be condemned because he does not support government efforts to assist the homeless and the poor. As Weissman writes, “the timing of Bezos’ new venture is especially fraught, given Amazon’s recent role in killing a tax that Seattle lawmakers had hoped would fund the city’s own anti-homelessness efforts.” Progressive critics prefer that social problems be addressed with tax dollars rather than through private initiatives.

Bezos also earned some criticism when he pledged $33 million earlier this year to provide college scholarships for so-called Dreamers (immigrants who were brought illegally to the United States by their parents). It mattered little that this is also a cause dear to the hearts of progressives. In Rolling Stone, Ed Burmila wrote: “Imagine if people like Bezos and companies like Amazon paid in practice anywhere close to the tax rates that apply to people of such great wealth in theory. Imagine if a company of such staggering wealth—$43 billion in revenue in a single quarter of 2017—paid its employees enough to send their own kids to college. If that happened, college applicants might not need to pray for the good will of benevolent billionaires to afford an education.” It is not easy for wealthy businessmen to win the good opinion of progressives who are not inclined to take yes for an answer.

The attacks on Bezos and his philanthropy follow a familiar pattern launched against almost every successful person who has given away money, going back more than a century to John D. Rockefeller, Andrew Carnegie, Julius Rosenwald, and others. How did they make all that money in the first place? Why don’t they run their businesses in more altruistic ways? Shouldn’t they pay their fair share in taxes? Imagine all the ways the government could do a better job of spending that money.

As Rob Reich, professor of political science at Stanford and co-director of its center on Philanthropy and Civil Society, writes in his new book Just Giving: Why Philanthropy Is Failing Democracy and How It Can Do Better, John D. Rockefeller faced a barrage of attacks when he tried to set up a charitable foundation. By the first decade of the 20th century, the oil titan received 400 to 500 letters per day asking for money. “Rockefeller, a devout Christian, prided himself on dispensing gifts to the genuinely needy, but the volume of requests made impossible any cursory examination much less serious review of each appeal,” Reich writes. “To match the size of his wealth, it was necessary to do more than accelerate the pace of giving. He would have to shift from retail charity to wholesale philanthropy, he would have to seek to address root causes of social ills rather than provide direct relief through alms, and he would have to pursue a broad mission with a global vision.” In other words, Rockefeller had so much money that it would be impossible to give it away wisely without a professional operation to guide it.

Rockefeller initially sought a federal charter for his foundation because state governments frequently capped the size of philanthropic endowments and limited their purposes. The objections to this effort came when Rockefeller tried to form “a perpetual charitable trust,” that is, a foundation that would exist to distribute his fortune, even after his death. Foreshadowing modern criticisms of wealthy donors, Teddy Roosevelt, then a former president, announced: “No amount of charities in spending such fortunes can compensate in any way for the misconduct in acquiring them. Indeed, the way he made his money should actually disqualify him from engaging in philanthropy.” The president of the American Federation of Labor, Samuel Gompers, suggested, “The one thing the world would gratefully accept from Mr. Rockefeller now would be the establishment of a great endowment of research and education to help other people see in time how they can keep from being like him.”

But the question at hand was not whether Rockefeller should be able to give his money away but rather how it should be given and how the U.S. government would treat this new conception of a private foundation. The Reverend John Haynes Holmes, testifying before the Commission on Industrial Relations, said that Rockefeller’s plan for a foundation “must be repugnant to the whole idea of a democratic society.” And the chair of that commission, Senator Frank Walsh of Missouri, observed that “huge philanthropic trusts, known as foundations, appear to be a menace to the welfare of society.”

This claim that charitable foundations are illegitimate because they are inconsistent with democratic values is at the heart of Reich’s critique of philanthropy. According to this critique, a democratic society is one where everyone enjoys equal opportunity from birth and no one is entitled to inherited advantages. Reich argues that allowing philanthropies to continue in perpetuity (or even after the death of their founders) means that a wealthy person has an outsize influence not only during his own time but well into the future. There is no reason from a legal perspective to respect the wishes or directions of the deceased. Reich cites John Stuart Mill, who argued with regard to corporations (including churches) that “the only moral duties which we are conscious of are toward living beings, either present or to come; who can be in some way better for what we do or forbear.”

For anyone who has followed the trajectory of perpetual foundations, it would appear that the opposite is true: The visions of philanthropists are rarely carried out with care by their successors, whether children, grandchildren, other family members, friends, or business associates. Indeed, in the cases of the Ford and MacArthur Foundations, subsequent generations seem today to be working hard to undermine the ideals of their founders. That is true of many other foundations as well that were created by conservative business figures but were allowed to drift into the hands of successors who do not share their views. For this reason, many conservatives now criticize the concept of perpetual foundations and write sympathetically about requirements to terminate those institutions after a defined period of time. As the late Sir John Templeton once advised: “Do your giving while you’re living so you’re knowing where it’s going.”

Reich’s critiques go beyond the problem of foundations existing in perpetuity. Even if one assumes that people who make money have the right to spend it (charitably or otherwise) in any way they wish, Reich asks why government needs to subsidize those charitable expenditures via tax policy. After all, as he emphasizes, the wealthy (those in the highest tax brackets) receive disproportionate benefits for their charitable gifts compared with those in the lowest brackets. Let the wealthy give away their money, he suggests, but also let them do without the tax subsidy, or at least equalize the subsidy as between those in the highest and lowest brackets.

For many people the answer will seem obvious: We offer tax benefits to subsidize things we think are good or of some social value. This is how Americans ended up with a home-mortgage deduction and a child tax credit. Home ownership and childbearing are thought to be social goods, even though there are many who argue that these incentives have distorted markets in ways that are undesirable or reward certain lifestyle choices about whether to rent or own a home, or whether to have several children or none at all. But Reich goes further to ask whether philanthropy as it is currently conducted is actually beneficial to society.

He explains: “There are more than 25 different categories of nonprofit, tax-exempt organizations in U.S. law, including social welfare organizations, fraternal societies, employee benefit associations, business leagues, chambers of commerce, veterans organizations, cemetery companies….” In addition to forgoing the taxes that these organizations would pay if they existed as for-profit institutions, people who give to these organizations may take an income-tax deduction, and foundations that contribute to these organizations also earn special tax privileges. Moreover, these tax privileges are “a blunt instrument,” Reich explains. The policy “fails to differentiate between the social benefits produced by various nonprofits.” The “$1,000 donation that you make to a contemporary arts museum to underwrite a video installation is worth exactly the same as the $1,000 that I give to a soup kitchen. Are these of equal social value? That social policy should be indifferent between these two kinds of goods and provide equivalent subsidies to their respective donors might seem odd.”

It is not really odd at all. Is a contribution to an art museum or a think tank of lesser benefit than an equal contribution to a soup kitchen or a homeless shelter? Reich may have an opinion, but so does everyone else.

Reich cites a recent study using “multiple data sets and extended generous assumptions about how to count giving that benefits the needy.” The study found that “at most one-third of charity is directed to providing for the needs of the poor.” Most giving in the United States goes to support religion and local churches—roughly $130 billion, Reich estimates. (This does not include groups such as the Salvation Army that are counted under “human services.”) Individuals (not foundations) donate most of these funds, and they typically itemize those deductions on their tax returns. The next largest sectors of giving are education and health care. He notes that wealthier givers are less likely to donate to help the poor but instead donate to museums and universities that disproportionately serve the rich.

The result, according to Reich, is that “philanthropy exacerbates social inequalities in a way that seems fundamentally at odds with certain egalitarian aims of social policy.” He offers the example of Parent Teacher Associations in wealthy school districts that supplement their public-school budgets with charitable contributions from local families. The effect is that the rich districts get richer—tax-subsidized—and the poor districts get nothing.

Well, not quite. Donations to health and science are a favored avenue of philanthropic giving. These kinds of programs are expensive, and philanthropic funds are small compared with government spending in both areas. But the benefits of that research help everyone, rich and poor alike, as in the discovery of vaccines, antibiotics, cancer treatments, and scientific breakthroughs that have universal applications.

In any case, the charitable deduction was not inserted into the tax code with the purpose of encouraging giving to the poor. The income tax itself came in via constitutional amendment in 1913, and World War I started just a year later, with the U.S. entering in 1917. At that point, Woodrow Wilson and the Congress raised the top marginal rate to 77 percent (from 1 percent in 1914) in order to pay for the war. Heads of schools, colleges, hospitals, and other such enterprises warned that rich people gave their excess funds via charitable donations and would no longer do so because those excess funds were going to the government. They suggested there should be exemptions for gifts to charitable organizations—scientific, religious, and educational. Aiding “the poor” had little to do with it. Indeed, during the debate over tax reform in 1969, there were no real complaints that foundations should be doing more to help the poor.

If progressives wish to claim that philanthropy can justify its place and its tax status only by helping the poor, they should describe how that might be done. After all, the U.S. government launched a war on poverty more than a half century ago, with highly uncertain results. What have they learned from this long-running experiment? What can be done with limited philanthropic resources to improve the situation? Reich does not say. What many donors do in the guise of “helping the poor” is to give funds to advocacy groups to lobby government to spend more money on public programs designed to help the poor. Somewhat paradoxically, those funds go disproportionately to middle- and upper-middle-class professionals adept at lobbying the government in support of public programs that similarly allocate funds to professionals who provide services to the poor.

Mr. Reich reports that the tax subsidy for charity came to $55 billion in a recent year. That is a sizable sum to be sure, but it comes to only about 1.5 percent of a federal budget that is currently approaching $4 trillion per year. One might argue that government could spend those funds more effectively, but if past performance is a predictor, then the chances of that are not very good.

Even foundations that have specifically devoted themselves to fighting inequality—the Ford Foundation announced recently that this was among its major goals—do not have much to show for their efforts. For one thing, the winds blowing in the opposite direction are very strong, as many economists have tried to point out. Just to list one key factor, the continuing bull market in stocks, bonds, and real estate means that the rich are likely to get richer for the foreseeable future, or at least as long as those markets remain on that upward path, because they disproportionately own those appreciating assets. Some significant portion of those funds flows back into the philanthropic sector through the creation of foundations and large charitable donations to colleges, universities, schools, and organizations that help the poor, the sick, and the handicapped. While the financial boom of the past several decades may have led to greater inequality, it has also led to significantly increasing charitable contributions and a vast expansion in the philanthropic sector.

Reich, like many progressives, seems to be of two minds when it comes to philanthropy and its privileged tax status. On the one hand, it is of dubious value because it promotes inequality and benefits the rich; on the other hand, it opens an avenue to criticize the sector and perhaps to exert control over it on the grounds that those are public funds and thus subject to public control. A few states, with California leading the way, have debated policies to force foundations to diversify their boards and staffs and to direct them to spend more of their funds on the poor. The greater the tax benefits for philanthropy, the more progressives will continue efforts to direct the flow of those funds on the grounds that tax-subsidized funds belong to the public–and thus should be government-controlled. At some point as this campaign gains force, those who have traditionally defended the tax subsidy will begin to wonder if it is really worth keeping.

Unlike many of his fellow critics on the left, Reich is willing to allow that there are some legitimate reasons for private foundations to exist: “A foundation is a corporate structure designed to deploy private assets for public benefit, where what is funded is subject to donor intent. Because donor preferences can be idiosyncratic, foundations can deliver idiosyncratic results.” Those results include “minority” public goods or “controversial” public goods, or in any case social benefits that would not otherwise be provided by government.

Reich explains that “foundations can serve as a democratic society’s ‘risk capital,’ a potent mechanism for experimentation in social policy with uncertain results over a long time horizon.” In making that case, he has the support of the late Justice Lewis Powell, who wrote in a 1983 decision (Bob Jones University vs. United States) that the tax subsidy for nonprofits “is one indispensable means of limiting the influence of government orthodoxy on important areas of community life.” As Powell argued, entrenched public policies and the political forces that defend them are able to close off governmental experimentation with new approaches to public problems, leaving private initiatives as the only means of promoting alternative approaches.

Reich has a partner in his critique of contemporary philanthropy in Anand Giridharadas, whose Winners Take All: The Elite Charade of Changing the World decries what he calls “the Aspen Consensus,” or the view that wealthy people of good intentions can gather in places no one else can afford to design ways to deploy their vast resources to improve the world. Critics of wealthy philanthropists usually challenge them to do more good, Giridharadas points out, but rarely tell them to do less harm. He criticizes leaders in the field like Darren Walker, president of the Ford Foundation, who joined the board of Pepsi, thereby earning a large annual fee but without altering the direction of that organization; and Bill Clinton, who earned large speaking fees from corporations while also directing his prominent family charity. Wealthy people seem to get wealthier, he observes, while also earning credit for their philanthropy, without questioning whether they deserve that wealth in the first place or whether the public should subsidize their highly publicized philanthropy.

But if there is such a thing as “the Aspen Consensus,” then it has less to do with inequality and the lifestyles of the rich and more to do with a kind of groupthink that permeates the world of high status philanthropy. Here is a small world convinced of its own virtue and good intentions, where everyone already knows the “right” solutions to society’s problems—usually some form of government intervention currently blocked by those ignorant voters who populate the middle and working classes. They gather in places like Aspen ostensibly to listen to panels about the great challenges facing society but then go home to put their money in the conventional charities. The irony is that most earned their money via some innovative breakthrough but then give it away as members of a herd.

Nor do they have much independence from government. The philanthropic consensus says that more money from government will solve social ills and that philanthropy should be used to encourage government to do so. Meanwhile the burgeoning nonprofit sector is funded in large part by big government itself: Nonprofit hospitals and clinics get the bulk of their funds from Medicaid and Medicare, while collegesand universities receive a large share of their tuition dollars from state and federal programs.

Even religious organizations, such as Catholic Charities, the U.S. Conference of Catholic Bishops, and World Vision, receive substantial shares of their budgets from federal grants. The publication Giving USA, which tracks charitable spending, reports that government now supplies one-third of all funds raised by not-for-profit institutions. Many of those groups receive government grants and then use those funds to lobby government to spend even more on their programs. So pervasive is public funding of private charities that in many areas it can be hard to discern any meaningful distinction between public and private institutions. If the original purpose of the charitable deduction was to preserve the independence of private institutions as alternatives to government, then it is no longer fulfilling that vital purpose.

This more than anything else is the true crisis of contemporary philanthropy: the gradual folding of private institutions into the expanding web of government programs to the point where they function as servants rather than alternatives to government. This runs against the spirit of American philanthropy that has sought to promote pluralism and diversity as a necessary foundation for a free and dynamic society. As Justice William Brennan wrote (Walz vs. Tax Commission of New York City, 1970), nonprofit groups receive tax exemptions because “each group contributes to the diversity of association, viewpoint, and enterprise essential to a vigorous pluralistic society.”

If doing away with their special tax status would help charities regain their independence from government, then it would be a step well worth considering. But in fact such a move might make the charitable sector even more dependent on government funds due to a potential decline in private donations arising from the loss of the tax deduction. Whether or not we keep the tax deduction for charitable donations is a question that should be judged not in terms of its consequences for poverty and inequality but in terms of the role we want philanthropy to play in a pluralistic society that places limits on the reach of government.Reich and his colleagues are not bothered by this question because they appear to welcome greater governmental controlover the charitable sector. For those who hold to a pluralistic vision of America, the great challenge is to restore the charitable deduction to its original purposes, and to liberate the charitable sector from its self-defeating dependence on government.